Vol 12 (2015) - Issue 5

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Entrusting the United Kingdom’s Boards of Directors with Takeover Defences: Carrots, Sticks and Executive Remuneration Contracts – Part Two

This article is Part Two of a two-part series intended to challenge the United Kingdom’s regulatory approach to Takeovers and propose a solution to the agency problem witnessed, between management and shareholders, during Takeovers. In the first half of this paper, I have outlined the takeover regulatory regimes in the UK and the US, as well as portraying the academic debate surrounding the 'proper' role of management during Takeovers.
I begin the second half with Section 4 by exploring the applicability of Takeover defences in the underlying UK corporate context notwithstanding the existence of the non-frustration rule. This analysis of Takeover defences is conducted with respect to their formal availability, effectiveness and most significantly their legal justification.
In Section 5 the final part of this two-series paper, having depicted the conflict of interests between management and shareholders I propose a solution which is founded on the premise that the Takeover context can be isolated from other corporate decisions. Contractual provisions can be installed in executives’ remuneration contracts whereby 'triggers' become operational in the wake of Takeovers and their reward or penalty depends on the choice of management.
If the contractual provisions are structured as suggested, I support that the fundamental gap observed, owing to an absence of trust and interests between management and shareholders, can be restrained. Furthermore, this arrangement has the additional effect of linking executive pay to long-term shareholder value. I conclude this part by explaining that this mechanism is addressed to remuneration committees and is not presented as a comprehensive legislative reform. Nonetheless, in order for these mechanisms to become a legal reality a repeal of the non-frustration rule is mandated.

Section 4: Takeover defences in the UK corporate context
An analysis on the practical readiness of takeover defences within the UK basic corporate law framework is necessary in order to grasp their operation. Kershaw advances the view that due to the current state of the UK’s corporate law framework 'adopting or rejecting board neutrality rule makes more than a trivial difference to the defensive capability of the board'.1 This is concluded by investigating takeover defences and whether they conform to the necessary characteristics of: 1) formal availability, 2) effectiveness in practice and 3) compliance with directors’ duties under the Companies Act 2006. The following section will consist of an analysis of the first two characteristics, of board installed takeover defences: poison pills, equity restructuring and the sale of important assets (Crown Jewels). The final part of this section will explore the defences’ legal compliance.

4.1 Poison pills
In the UK Company law framework Kershaw notes the formal availability of the pill in the absence of the non-frustration principle exists albeit requiring specific ex-ante shareholder authorisation. Additionally, subject to s.561(3) Companies Act 2006 there are no difficulties with pre-emption rights as they do not apply in relation to the allotment of shares in exercise of an option. Nonetheless, support for the invalidity of the poison pill is found in it’s so-called 'discriminatory' function.